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The recent decision of Justice Black, In the matter of
Shepherds Producers Co-Operative Ltd (in liq) [2012] NSWSC
390, has applied the provisions of Section 564 of the Corporations
Act to circumstances where creditors of an entity in liquidation
have provided funds to the liquidators to conduct public
examinations.
Section 564 of the Corporations Act provides the Court with a
discretionary power, in a winding up, to distribute property
recovered through litigation that is funded or indemnified by
certain creditors.
Ordinarily, Section 564 is invoked in circumstances where
creditors provide funding or indemnities for litigation that
directly results in the recovery of property. However, in the
Shepherds decision, the Court held that Section 564 can also be
invoked in favour of creditors that fund the public examinations
that lead to litigation and ultimately the recovery of
property.
The liquidators of the insolvent entity made an application to
the Court for orders under Section 564 permitting preferential
payment to creditors who provided funds to the liquidators to
conduct public examinations.
The liquidators had sent notices to the creditors inviting
contributions to cover the costs of the examination process
(estimated at $90,000). The notice informed creditors that such
costs were speculative in nature, but stated that an application
might later be made to the Court to grant priority to the creditors
who provided funding in the distribution of any funds subsequently
recovered.
A number of creditors provided funding to the liquidators and
the examinations were able to proceed. Evidence was before the
Court that those examinations could not have been conducted without
that funding.
Based on the information obtained during the examinations, the
liquidators were able to obtain funding from a litigation funder to
conduct further examinations and ultimately bring proceedings for
an insolvent trading claim. The insolvent trading claim was
eventually settled with the liquidators receiving a significant sum
of money for the liquidation.
In those circumstances, the liquidators sought orders permitting
the distribution of the whole of the residual amount available in
the winding up (being the funds recovered from the settlement of
the litigation less costs and expenses) to the creditors that had
funded the initial examinations, with the other creditors receiving
nothing.
The judge granted the orders sought by the liquidator. In
reaching his conclusion, the judge found that had it not been for
the risk taken by those creditors providing the funding for the
initial examinations, there would have been no funds available for
distribution.
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